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Financial Case Study Examples

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Financial ratio analysis is an important topic and is covered in all mainstream corporate finance textbooks. It is also a popular agenda item in investment club meetings. It is widely used to summarize the information in a company's financial statements in assessing its financial health. In today's information technology world, real time financial data are readily available via the Internet. Performing financial ratio analysis using publications, such as Robert Morris Associates’ Annual Statement Studies, Dun & Bradstreet’s Key Business Ratios, Moody’s Manuals, Standard & Poor’s Corporation Records, Value Line Investment Survey, etc., is no longer efficient. Since students and investors now have easy access to on-line databases, the assignments on financial ratio analysis can be modified accordingly to enhance learning. Based upon my experience as a finance professor and as a member of a local investment club, I have prepared this  teaching note to help students and investors in performing financial ratio analysis via an on-line database, Dow Jones Interactive. This database is a Web based, enterprise wide business news and research solution supported by Dow Jones & Company, the parent company of The Wall Street Journal.  The class assignment presented herein is designed to demonstrate how to assess a company's overall operations over time and its current financial standing in the industry.

THE FINANCIAL RATIO ANALYSIS ASSIGNMENT

Students will work on the assignment collaboratively in groups of three or four students. Each group will select an industry of interest to the group, and each student will select a company within that industry. Students will download the relevant financial data from the Internet and perform ratio analysis for the selected companies. Since successful financial ratio analysis is as much an art as it is a science, students must use common sense and sound judgment throughout the analysis. The purpose of this assignment is to provide students with the opportunity to:

  • retrieve real time financial data via the Web;
  • analyze the financial performance of selected companies;
  • practice communication skills, both in writing (through word processing) and in speaking (through giving a Power Point presentation);
  • enhance teamwork skills.

TREND ANALYSIS

To evaluate how the selected company is performing over time, more than one year's financial ratios are required. Students are instructed to follow the path shown below to retrieve the financial profile for the selected company via Dow Jones Interactive. (The initial steps may differ depending on how your library's site is organized.)

  • Go to the University Library home page
  • Click on ResearchResources
  • Click on Dow Jones Interactive (DJI)
  • On DJI page, click on Company and Industry Center
  • Click on Financial Profile
  • Select Region: Worldwide
  • Enter Company Symbol: ____________
  • Display as: Formatted report
  • Click on Get Report
  • Download the report including Key Financial Ratios, Balance Sheets, Income Statements and Key Competitors (see APPENDIX 1 for an excerpt Financial Profile of Intel)

Trend analysis provides signals as to whether the company's financial health is likely to improve or deteriorate. Each student will perform the trend analysis based upon the following financial ratios:

  • Leverage Ratios: to measure the extent to which the company's assets are financed with debt;
  • Liquidity Ratios: to measure the company's ability to pay its bills;
  • Profitability Ratios: to measure the company's ability to generate earnings;
  • Efficiency Ratios: to measure the company's ability to utilize its assets;
  • Market Value Ratios: to measure the market perception about the company's future prospects.

The downloaded four years' balance sheets and income statements are to be used to calculate the financial ratios not reported in the DJI. For example, four leverage ratios (Debt/Equity, LT Debt/ Cap, LT Debt/Tot Debt, and LT Debt/Tot Assets) are reported, but the interest coverage ratio (= earnings available for interest/interest expenses) is missing in the DJI. Students are required to obtain the earnings and interest expenses information from the income statements and calculate this ratio to measure the company's ability to service the debt. In the area of liquidity, current ratio (= current assets/current liabilities) and quick ratio (= quick assets/ current liabilities) are reported, but the interval measure (= quick assets/daily operating expenditures) is not. Students are required to obtain quick assets (= cash & equivalent + receivables) from the balance sheets and operating expenditures from the income statements, and calculate this ratio to measure how long the company can keep up with its bills using only existing quick assets. As the financial ratios in each of the five performance areas are compiled, they are analyzed across time. A sample trend analysis for Intel is presented (below) in Table 1. 

Table 1. Intel Trend Analysis


 

Performance Area

1998

1997

1996

1995

Trend

Leverage:

 

 

 

 

 

Debt % Tot Assets

25.7

33.2

28.9

30.6

Drop in leverage during 1998 

Interest Coverage 

269.7

395.8

318.4

195.4

Lower coverage during 1998 

Liquidity:

 

 

 

 

 

Current Ratio 

2.3

2.6

2.8

2.2

Lower liquidity since 1996

Quick Ratio 

1.0

1.3

1.6

1.3

Lower liquidity since 1996

Interval Measure (days)

63.8

90.8

115.3

86.4

Lower liquidity since 1996

Profitability:

 

 

 

 

 

Profit Margin (%)

23.1

27.7

24.7

22.0

Lower profitability during 1998

Return on Assets (%)

19.3

24.0

21.7

20.4

Lower ROA during 1998

Return on Equity (%)

26.0

36.0

30.6

29.4

Lower ROE during 1998

Efficiency:

 

 

 

 

 

Asset Turnover 

.835

.868

.878

.926

Lower efficiency since 1995

Receivables Turnover 

7.5

7.0

6.1

6.4

Increased efficiency since 1996

Inventory Turnover 

5.7

5.2

4.4

4.1

Increased efficiency since 1995

Market Value:

 

 

 

 

 

Price/Book Value 

8.41

5.92

6.37

3.83

Good market perceptions 

Du Pont Analysis

Since it is important to understand how the company's profitability, efficiency, and leverage are linked in its financial performance, students are required to demonstrate and evaluate its Du Pont system over time. The company's return on assets, ROA (=net income/assets), can be expressed as:

ROA = (Net Income/Revenue) * (Revenue/Assets) = Profit Margin * Asset Turnover

And the company's return on equity, ROE (=net income/equity), can be expressed as

ROE = (Net Income/Revenue) * (Revenue/Assets) * (Assets/Equity) = ROA * Equity Multiplier

Both the company's profitability (as measured in terms of profit margin) and efficiency (as measured in terms of asset turnover) determine its ROA. This ROA, along with the company's financial leverage (as measured in terms of  its equity multiplier), contributes to its ROE. As the company's use of leverage magnifies its ROE, students are required to examine ROE carefully. The changes in the company's ROE are to be noted and explained through its profit margin, asset turnover, and equity multiplier over time. The objective is to identify the company's strong area that can be capitalized upon and/or its weak area that must be improved upon. See Table 2 (below) for a sample Du Pont analysis for Intel. 

Table 2. Intel Du Pont Analysis


 

Item / Ratio

1998

1997

1996

1995

Evaluation

Net Income, $million 

(from Income statements)

6068

6945

5157

3566

 

Revenue, $million 

(from Income statements)

26273

25070

20847

16202

 

Assets, $million 

(from balance sheets)

31471

28880

23735

17504

 

Equity, $million 

(from balance sheets)

23377

19295

16872

12140

 

Profit Margin % 

(Net Income/Revenue)

23.1

27.7

24.70

22.0

Drop in profitability during 1998

Asset Turnover 

(Revenue/Assets)

.835

.868

.878

.926

Lower efficiency since 1995

Return on Assets % 

(Profit Margin* Asset Turnover)

19.3

24

21.7

20.4

Drop in ROA during 1998

Equity Multiplier 

(Assets/Equity)

1.35

1.50

1.41

1.44

Decrease in leverage during 1998

Return on Equity % 

(ROA* Equity Multiplier)

26.0

36.0

30.6

29.4

Sharp decline in ROE during 1998 

 

INDUSTRY COMPARATIVE ANALYSIS

To explain the variation in the company's financial ratios over time, the industry comparative analysis must be performed along with the trend analysis. To evaluate the company's financial performance against its key competitors, the company-to- company comparison report is retrieved from the following path.

  • On DJI page, click on Company/Industry Comparison Reports
  • Select Report: Company to Company Comparison
  • Enter First Company's Symbol: _____________
  • Enter Second Company's Symbol: _____________
  • Select Display as: Formatted report
  • Click on Get Report
  • Download the report (see APPENDIX 2 for a Company to Company Comparison Report for Intel)

The financial ratios in each of the performance areas are then analyzed across companies in the industry/group. Students compare their company's financial ratios with those of its key competitors and determine whether managerial or environmental factors cause the trend of the company's financial performance. To further assess the company's financial standing in its primary industry, the company to industry comparison report is retrieved. (See below.)

  • Back to DJI page, click on Company/Industry Comparison Reports
  • Select Report: Company to Industry Comparison
  • Enter Company Symbol: _____________
  • Select Compare to: this Company's Primary Industry (as identified by DJI)
  • Select Display as: Formatted report
  • Click on Get Report
  • Download the report (see APPENDIX 3 for a Company to Primary Industry Comparison Report for Intel)

The following specific industry norms are available in DJI and used as benchmarks in this analysis:

  • Liquidity: Current Ratio;
  • Leverage: Debt/Equity, Interest Coverage;
  • Profitability: Profit Margin, Return on Equity, Return on Assets;
  • Efficiency: Revenue/Assets;
  • Market Value: Price/Book Value, Price/Earnings, Dividend Yield.

Students will report on how the company performs as compared to the industry norms and where the company stands relative to its competitors in the industry. The company's weak and/or strong areas of performance must be identified and recommendations for improvement presented. See Table 3 (below) for a sample industry comparative analysis for Intel.

Table 3. Intel Industry Comparative Analysis


 

Performance Area

Intel

AMD*

Semiconductors

Evaluation

Leverage:

 

 

 

Excellent

Debt/Equity (%)

3

73

19

Low leverage

Interest Coverage

269.7

-

20.8

High coverage

Liquidity:

 

 

 

Good

Current Ratio

3.2

1.7

2.8

Above average liquidity

Profitability:

 

 

 

Excellent

Profit Margin (%)

26.1

-0.9

11.1

High profitability

Return on Assets (%)

19.3

-2.4

7.2

High ROA

Return on Equity (%)

28.9

-

14.1

High ROE

Efficiency:

 

 

 

Good

Revenue/Assets

.86

.64

.82

Above average 

Market Value:

 

 

 

Good 

Price/Book Value 

8.41

2.10

6.04

High price to book

Price/Earnings 

36.3

-

67.3

Below average PE

Dividend Yield (%)

0.2

0.0

0.1

Average 

* AMD, is one of Intel's key competitors in semiconductors industry

Go to additional Intel data.

CASE BRIEF AND PRESENTATION

To reinforce the teamwork effort, each group must submit a written report summarizing the ratio analyses of the companies in their industry. Students will work together and produce a group report that is concise and similar in style to an executive summary with no more than four typed pages plus exhibits. Each group will also give an oral presentation to brief the class on their analyses, their recommendations, and the limitations of their analyses. Charts and tables are required in the Power Point presentation.

The incorporation of computer technology in finance classes has become more popular than ever in this information technology rich environment. Mediated classrooms have grown rapidly in numbers throughout universities worldwide. This teaching note demonstrates how finance professors, business students, and investment club members can take advantage of the changing environment to enhance learning. Students can easily retrieve a company's real time financial data via the Internet and analyze its financial performance over time. The assignment presented herein is designed to help students/investors learn how to assess the company's overall operations and its current financial standing in the industry through teamwork and state of the art computer technology. It can be used in any corporate finance classes and/or investment clubs.

Bodie, Z. and R.C. Merton. Finance (2000),Prentice-Hall, Inc.

Brealey, R.A. and S.C. Myers. Principles of Corporate Finance (2000), 6th Edition, The McGraw-Hill Companies, Inc.

Brealey, R.A., S.C. Myers and A.J. Marcus. Fundamentals of Corporate Finance (1999), 2nd Edition, The McGraw-Hill Companies, Inc.

Brigham, E.F. and J.F. Houston. Fundamentals of Financial Management (1999), Concise 2nd Edition, The Dryden Press.

Brigham, E.F., L.C. Gapenski and M.C. Ehrhardt. Financial Management: Theory and Practice (1999), 9th Edition, The Dryden Press.

Gitman, L.J. Principles ofManagerial Finance (2000), 9th Edition, Addison Wesley Longman, Inc.

Keown, A., J.W. Petty, D.F. Scott and J.D. Martin. Foundations of Finance (1998), 2nd Edition, Prentice-Hall, Inc.

Ross, S.A., R.W. Westerfield and B.D. Jordan. Essentials of Corporate Finance (1999), 2nd Edition, Irwin/McGraw-Hill.

Ross, S.A., R.W. Westerfield and J. Jaffe. Corporate Finance (1999), 5th Edition, Irwin/McGraw-Hill.

Scott, D.F., J.D. Martin, J.W. Petty and A. Keown. Basic Financial Management (1999), 8th Edition, Prentice-Hall, Inc.



APPENDIX 1. FINANCIAL PROFILE


Used with permission from Dow Jones Interactive



Used with permission from Dow Jones Interactive



 

 

 

 

 


 


 


 


 


 


 


 


 

Guide to financial statement analysis

The main task of an analyst is to perform an extensive analysis of financial statements.  In this free guide, we will break down the most important methods, types, and approaches to financial analysis.

This guide is designed to be useful for beginners and advanced finance professionals, with the main topics covering: (1) income statement, (2) balance sheet, (3) cash flow, and (4) rates of return.

Image: Example financial analysis template.

 

#1 Income statement analysis

Most analysts start their analysis of financial statements with the income statement.  Intuitively, this is usually the first thing we think about with a business… we often ask questions like, “how much revenue does it have, is it profitable, what are the margins like?”

In order to answer these questions, and much more we will dive into the income statement to get started.

There are two main types of analysis we will perform: vertical analysis and horizontal analysis.

 

Vertical analysis

With this method of analysis of financial statements, we will look up and down the income statement (hence, “vertical” analysis) to see how every line item compares to revenue, as a percentage.

For example, in the income statement shown below, we have the total dollar amounts and the percentages, which make up the vertical analysis.

 

As you see in the above example, we do a thorough analysis of the income statement by seeing each line item as a proportion of revenue.

The key metrics we look at are:

 

To learn how to perform this analysis step-by-step please check out our FinancialAnalysis Fundamentals Course.

 

Horizontal Analysis

Now it’s time to look at a different way to evaluate the income statement.  With horizontal analysis, we look across the income statement at the year-over-year (YoY) change in each line item.

In order to perform this exercise, you need to take the value in Period N and divide it by the value in Period N-1 and then subtract 1 from that number to get the percent change.

For example, revenue in 2017 was $4,000 and in 2016 it was $3,000.  The YoY change in revenue is equal to $4,000 / $3,000 minus one, which equals 33%.

 

To see exactly how to perform this horizontal analysis of financial statements please enroll in our Financial Analysis Fundamentals Course now!

 

#2 Balance sheet and leverage ratios

Let’s move on to the balance sheet.  In this section of financial statement analysis, we will evaluate the operational efficiency of the business.  We will take several items on the income statement, and compare them to the company’s capital assets on the balance sheet.

The balance sheet metrics can be divided into several categories, including: liquidity, leverage, and operational efficiency.

 

The main liquidity ratios for a business are:

 

The main leverage ratios are:

  • Debt to equity
  • Debt to capital
  • Debt to EBITDA
  • Interest coverage
  • Fixed charge coverage ratio

 

The main operating efficiency ratios are:

 

Using these ratios, we can determine how efficiently a company is generating revenue and how quickly it’s selling inventory.

 

 

Using the above financial ratios derived from the balance sheet, we will help you assess the solvency and leverage of a business.

In our course on analysisof financial statements, we explore all the above metrics and ratios in great detail.

 

#3 Cash flow statement analysis

With the income statement and balance sheet under our belt, let’s look at the cash flow statement and all the insights it tells us about the business.

The cash flow statement will help us understand the inflows and outflows of cash over the time period we’re looking at.

 

Cash flow statement overview

The cash flow statement, or statement of cash flow, consist of three components:

Each of these three sections tells us a unique and important part of the company’s sources and uses of cash of the time period being evaluated.

Many investors consider the cash flow statement the most important indicator of a company’s performance, and it’s hard to imagine that until only recently companies didn’t even have to file a cash flow statement.

Today, investors quickly flip to this section to see if the company is actually making money or not, and what it’s funding requirements are.

It’s important to understand how different ratios can be used to properly assess the operation of an organization from a cash management standpoint.

In our Financial Analysis Course, we go over the different types of debt financing:

  • Bonds
  • Term debt
  • Syndicated loans and leasing
  • Preferred shares
  • Common shares

Below is an example of the cash flow statement and it’s three main components.  Linking the 3 statements together in Excel is the building block of financial modeling.  To learn more, please see our online courses to learn the process step by step.

 

 

#4 Rates of return and profitability analysis

In this part of our analysis of financial statements, we unlock the drivers of financial performance. By using the pyramid of ratios, we are able to demonstrate how you can determine the profitability, efficiency, and leverage drivers for any business.

This is the most advanced section and we recommend you watch a demonstration of how professionals perform this analysis.

The course includes a hands-on case study and Excel templates that can be used to calculate individual ratios and a pyramid of ratios from any set of financial statements.

The key insights to be derived from the pyramid of ratios includes:

 

 

By constructing the pyramid of ratios, yourself you will have an extremely solid understanding of the business and its financial statements.

Enroll in our financial analysis course to get started now!

 

More analysis of financial statements

We hope this guide on analysis of financial statements has been a valuable resource for you.  If you’d like to keep learning with free CFI resources, we highly recommend these additional guides to improve your financial statement analysis:

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